What is an example of an indirect cost?

Utilities for the manufacturing facility serve as an example of an indirect cost because they are not directly traceable to a specific product or service. Instead, these costs support the overall manufacturing process but do not vary directly with production levels. Indirect costs, often referred to as overhead, include expenses that are necessary for the operation of the business but cannot be directly linked to the production of specific goods. Utilities cover essential services like electricity, water, and heating, which are crucial for maintaining the manufacturing environment but do not contribute to the creation of a single product.

In contrast, raw materials, salaries for production workers, and transport costs for goods sold are direct costs associated with the production process. Raw materials are the inputs that are transformed into finished goods, production worker salaries are tied directly to any manufacturing activity, and transport costs relate directly to delivering goods to customers. This direct correlation distinguishes them from indirect costs.